Follow The Money
The true impact of the coronavirus on the global economy is still debatable but one thing is clear. There will be an impact and governments and businesses are getting ready. Right now the fight is centered on slowing the spread and containment. Schools are closing, employees are being asked to work from home, travel restrictions are in place and vacations are being canceled. I mean, who wants to go out and get sick especially if there is any chance, however small, you might die from it?
What this leaves us with is a lot of Americans that are going to stay home more and that means a change in spending habits. The goods news is that labor and economic data released this week show the economy is still strong. Eventually, the coronavirus will pass and when it does we’ll all go back to business-as-usual. Until then, look for these stocks to get a boost from coronavirus-inspired spending.
First Stop, The Grocery Store
The first thing consumers are going to do is head to the grocery store. The CDC and Federal Government are recommending at least two weeks of supplies which means quite a bit of shopping needs to be done. Companies like Kroger (KR), Costco (COST), and even Walmart (WMT) and Target (TGT) are going to see an uptick in sales.
Kroger just reported earnings today and the signs are good its retargeting program is working. The company has been working hard over the past two years to redefine its user experience to meet the needs of both in-store and curbside pickup customers. Comps are up 2.0% over last year which, aided by expanding margins, led to better than expected revenue and earnings.
The outlook for next year did not include mention of the coronavirus but rest assured there is going to be one. As I was writing this article Kroger announced shortages and rationing of high-demand items.
Coronavirus fears have shares of Costco moving higher today as well. Costco is expected to report earnings after the closing bell this evening. Already in the news for shortages along the West Coast, the company is expected to gain market share because of it. Costco yields a tepid 0.85% but it’s a safe distribution, Kroger pays an equally safe distribution with a higher 2.0% yield. Both companies are committed dividend-growers.
Campbell’s Soup Is MMM, MMM Good
Campbell Soup Company (CPB) share prices have been spiking while the broader market enters correction. The company just reported better than expected earnigns and raised full year 2020 guidance.
The coronavirus has sparked intense buying of staple items in a way Campbell can dominate. There is no better comfort food for when you are sick and its cold outside than a hot bowl of soup. Add in organic strength the company is showing as it shifts into higher-demand verticals and you have a recipe for revenue and EPS growth in 2020.
Campbell’s is also a good dividend payer. The stock is yielding close to 2.6% at today’s prices and the distribution is relatively safe. The company has a low payout ratio and a history of past increases so there is a chance for additional increases as business improves.
Here We Are Now, Entertain Us
Once all those groceries get home consumers are going to need something to do. That’s where stocks like Netflix (NFLX) come into the picture. As the leading provider of streaming media, it is well-positioned in this regard. What we can expect here is a surge in user growth, revenue and EPS that will accelerate an already robust growth outlook. The consensus for 2020 is 18% revenue and 40% earnings growth with little change in recent weeks.
Netflix has been an obvious winner with a number of positive analyst notes in the last few weeks. David Miller at Imperial Capital sees the stock as “virus proof” and so cheap “it is impervious to secondary recessionary effects”. Trading at 64X forward earnings I don’t know how cheap Netflix is but price action has been holding up pretty well. Trading at $382.50 it is at the consensus target. A round of upgrades and/or price target increases could get this stock moving.
It's Not All About Fun
Some folks will still have to work and that bodes well for remote-work platforms and file-sharing services like DropBox (DBX), Slack (WORK), And Zoom (ZOOM). Dropbox reported earnings a few weeks ago and saw its shares spike higher. The company reported a surprisingly large improvement in margins that analysts have labeled shocking and game-changing. Couple this with a growing number of companies seeking work-from-home options and the stage is set for the outperformance of consensus estimates in 2020.
7 Stocks That Will Help You Forget About the Fed
Normally when the Federal Reserve (i.e. the Fed) makes an announcement, the market reacts predictably. That’s due, in large part, to the nature of what the Fed normally announces. Will interest rates go up, down, or remain unchanged? And for their part, the markets have a pretty good idea what the Fed will do before they do it.
But the Fed’s announcement of August 26 was a little different. They talked briefly about interest rates (they’re staying really low for a long time). But they were more concerned about inflation. Well, the Fed is always concerned about inflation, but this time they really mean it. Basic economics says that low-interest rates should spur inflation.
However, the market has been defying conventional wisdom and the Fed is not getting the inflation they want. So the Fed has basically said that they’re letting inflation go rogue. If it goes above their target 2% rate, so be it. The Fed is done trying to hit a target.
At first, the markets cheered the news. Not only was the Fed not taking away the punch bowl, but they were also going to keep the low rate liquidity going for a long time!
But after a little while to digest things, investors are realizing they have to be grown-ups about this. And now investors are considering how to rebalance their portfolios for the remainder of 2020.
I don’t know about them, but if I were you I would target companies that have a high free cash flow (FCF). Whether it’s your personal finances or in evaluating a stock, cash flow is your friend.
When a corporation has high FCF, they have more strong growth in good markets and more flexibility during when the economy is weaker.
As institutional investors come back into the market, it’s time for you to reposition your portfolio for whatever comes next.
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